Monthly Archives: March 2006

Like any other business, we struggle to define our growth strategy. In the world of online media, the landscape is changing rapidly, but to our surprise the trend is in line with the overall advertising trends. At this time, our business can aptly be described as following the 80/20 rule. In other words, 80% our income comes from the United States, despite the fact that English is spoken by so many people all over the world and our overseas traffic is more than 20%.

Where should online media businesses grow?

According to ZenithOptimedia, US is the world’s 800-pound gorilla. Japan comes second, though some interesting trends are emerging. While US is still the largest contributor to global advertising growth, providing 33% of the ad dollars added between 2004 and 2008 while accounting for 41%-43% of global advertising, the â€˜BRIICâ€™ economies of Brazil, Russia, India, Indonesia and China are only 6%-10% of the sector but are all among the top eight growers, and predicted to supply 26% of global ad growth 2004-2008. By contrast, the five large European markets (UK, Germany, France, Italy, and Spain) are making a predicted contribution of 11%, and their combined share of the global ad market consequently shrinks from 19% to 17% over the same period.

So, it does make some sense for us to grow in China, Brazil, Russia, and India (we already cover the Japanese market in a small way). Should we do it? Not really. We do not plan to allocate any significant resources since the overall pie is still tiny, though we are trying to create a footprint there so that we can still ride the wave. India will probably be the easiest country to penetrate since the vast majority of the surfers have some level of comfort with English. Other countries do not yet justify an investment.

For companies like ours who literally blog for dollars, the acquisition of iVillage by NBC/GE is great news, though I have serious doubts if it is such a great news for GE shareholders. Let us take a look at iVillage. I took their financials since 2000 and plotted them. Not a very pretty picture as you can see in the chart below. The accumulated losses are huge and last year was the first time they made a profit.

So NBC paid approximately 60X earnings multiple (the golden days of the web are back, it seems) and over 6X revenue multiple. While smaller online media companies will be valued differently, if you combine this data with what AOL paid for Weblogs, Inc, and what Scripps paid for Shopzilla, it seems that large media companies are realizing that the future is online – a safe conclusion to draw from the M&A activity in blogosphere.

So what does it mean for you?

While iVillage is one of the most popular websites with traffic that continues to grow, I am not a big fan of traffic if it is not monetized well. To us here at eCreativa, the bottomline is everything. So if you are tempted to grow just the traffic – without a proportionate increase in net income – unless you can find a buyer like GE, it may not work. The point to note here is that even though a deal like this may appear to contradict GE’s obsession with market leadership and earnings, the company may simply be planning to leverage the traffic in other ways.
And can they make it more profitable? Absolutely. From our experience we know that many online publishers have very high-cost business models and the financials of iVillage clearly indicate that there is plenty of room to cut costs.

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About

Jay Dwivedi is a management consultant at xInvest Consultants. He is based in the Metrowest Boston area and helps executives and entrepreneurs analyze business problems, provide solutions, and implement them. You can write to him
here.

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